BFA605 Financial and Corporate Accounting : Recoverable Amounts

Part A

Among the most important accounting principles includes that fact that there is a great requirement that the assets with high valuations is the financial position statement. This necessitates the requisite of certain value concepts, in opposition to which the asset carrying amount can be considered for making sure whether it is high. “Paragraph 1 of AASB 136” intends to explain that the asset impairment can be understood as certain methods that must be implemented by several companies in making sure that assets are taken into account as amounts that is not more than the recoverable amounts (Al Dabbous, Abughazaleh and Al-Hares 2015). Moreover, the mentioned paragraph also indicates that assets are maintained above their recoverable amounts in certain situation where the amount that is to be recovered by asset sale is decreased than carrying amounts. In such scenario, the assets might be considered as impaired and such standards makes sure that a company realises impairment losses in consideration to time of cash generating unit reversal and necessary disclosures.

Realization of impairment loss can take place if a cash generating unit’s carrying value is higher than recoverable amount that is increased than an asset’s fair value subtracted from used value and selling costs (Avallone and Quagli 2015). “Paragraph 59 of AASB 136” explained that if recoverable amount of a cash generating unit is decreased in contrast to its carrying value, that the later must be decreased than the former. This minimization is adjusted being an impairment loss. Conversely, a method of recording an impairment loss might be different that is dependent on the technique that an asset it is based on a model all of revaluation and mentioned as cost. “Paragraph 60 of AASB 136” explained that impairment loss requires being realised in a prompt manner unless a carried asset is prepared at the re-valued amount in accordance with different standard.  This standard explains the re-evaluation model Within AASB 116 (Filip, Jeanjean and Paugam 2015).  Additionally an impairment loss the link to the re-valued asset that must be treated as decreased revaluation based on different standard.

There exist two techniques by means of which assets might be impaired and this encompasses model of cost and revaluation.  Based on cost model in alignment with “Paragraph 61 of AASB 136”, it is anticipated that if cost is employed for recording impaired asset, impairment loss must be considered immediately for profit and loss.  This indicates loss might be considered as the expenditure in a company’s income statement.  As per revaluation model and based on with “Paragraph 60 of AASB 136”, while carrying certain impaired asset such as property plant and equipment is prepared at  re-valued amount, impairment Los treatment is identical to revaluation decrease (Huikku, Mouritsen and Silvola 2017). For reiteration, impairment loss on re-valued asset is mentioned in income statement at first so that it is not more than surplus sum of revaluation for the same asset.  The objective is attained for the asset by debiting the revaluation surplus all leftover account that is implemented to asset and deferred tax liability before experiencing loss balance being expenditures in income statement.  Moreover, there can be examples in which recoverable amount of an asset that is written in value in previous years is beyond carrying value of the asset.  Based on “Paragraph 110 of AASB 136”, a company must reveal a sign that an impairment loss experienced in past years of an asset other than goodwill could have decreased or no longer is present (Kabir, Rahman and Su 2017). For such reasons, “Paragraph 111 of AASB 136” requires internal along with external symbols for impairment loss reversal.  Such symbols can be gradual increase in an asset’s market value, significant change with high impact on a company, market interest rate decrease, effective changes in use of asset and instances that explains economic performance of an asset is better than the expectations.

Impairment loss reversal might be carried out with support of two distinct models that encompass cost and revaluation model.  In this situation where an asset is based on the cost model, impairment loss reversal cannot increase carrying value of an asset more than its depreciated value.  In contrast, it must be considered that an asset can be liable to gradual depreciation policy (Wang and Hooper 2014).  This is the reason for which an asset is considered as cost, reversal of impairment loss needs being realised as an income aspect in income statement of a company based on “Paragraph 119 of AASB 136”.

For example it is assumed that for machinery impairment loss of $13,000 was recorded at June 30, 2014.  In addition it is assumed that on 30^th June 2016, machinery’s carrying value was $11,333. This has cost of $50,000 minus accumulated depreciation of $25,667 and impairment accumulated losses of $13,000.  The recovery of the value is observed to be $18,000.  The real rate of depreciation is assumed to be 10% yearly for over six years.  In such condition, the machinery’s carrying value might be $20,000.  For the recoverable value is not beyond this amount, previously realised impairment losses of $6,667 might be reversed for explaining a machinery’s new carrying value is $18,000.  This can increase the previous carrying amount.  In such condition, the accumulated impairment loss might be debited and reversal of an impairment loss might be credited with an amount of $6,667.

In a revaluation model if a real impairment loss is deemed as expenditure and recorded in income statement, the reversal might be carried out in similar manner by crediting income amount (Picker et al. 2016).  For example that is assumed that carrying amount of an asset of $90,000 having $100,000 in the equipment account and $10,000 in accumulated depreciation.  To record previous impairment losses $30,000 revaluation decrements was realised.  Such losses has decreased revaluation surplus balance and deferred tax liability account.  Recoverable amount of an asset is assessed at $110,000.  For this reason recording reversal of $20,000 the previous impairment loss, equipment and accumulated depreciation accounts might be debited with balance of $10,000.  In addition, the revaluation surplus accounts and deferred tax liability might be credited that balances $6,000 and $14,000.  Depreciation must be adjusted in future years to apportion new carrying amount of asset minus residual value for its useful life (Lobo et al. 2017).

Part B

Reference List

Al Dabbous, N., Abughazaleh, N. and Al-Hares, O., 2015. The Effect of Audit Quality and Audit Committees on Goodwill Impairment Losses. International Journal of Accounting and Financial Reporting, 5(1), pp.48-62.

Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.

Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment losses: Evidence and effect on future performance. Journal of Business Finance & Accounting, 42(3-4), pp.515-554.

Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.

Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. Kabir, H., Rahman, A.R. and Su, L., 2017.

Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., 2017. The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), pp.118-153.

Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.

Wang, J. and Hooper, K., 2014. " To be or not to be": impairment practices among Indian listed companies.